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Severance pay formula applied by courts to be changed

On 30 October 2008 the Association of Dutch Sub-District Court Judges (Kring van Kantonrechters) decided to amend the formula developed and used by such judges for the calculation of severance pay when an employment contract is rescinded. The main changes are outlined below.

The formula in general

The sub-district court formula was developed by the "Association of Dutch Sub-District Court Judges" (the "Association") for use in determining the amount of severance pay to be granted to an employee whose employment contract is rescinded. Under the relevant statutory provision, sub-district courts may award fair compensation to either of the parties in such a situation, although in practice it is often only awarded to employees. The purpose of the formula is to create more uniformity in the manner in which the judges calculate the compensation. Although they are not legally required to apply the formula, in fact they almost always do so.

The current formula

Under the current formula, the severance pay is calculated by multiplying the employee's number of years of service (A) by his gross monthly salary (B) and a correction factor (C). C is in principle equal to 1 if the reason for the rescission cannot be blamed on one of the parties and does not fall within the employee's "sphere of risk", and there are no other special circumstances. In practice, C fluctuates between 0 and 2.

The most important changes

A different calculation of the number of years of service;

More attention to the employee's position in the labour market and the employer's financial condition;

In the case of older employees, more tailoring to their specific situation; and

Clarification of the severance pay awarded to employees with a short-term employment.

Calculation of number of years of service: factor A

The first change concerns the calculation of the number of years of service (factor A). Under the current formula, years of service for the relevant employer up to the age of 40 count for 1, from the age of 40 to 50 for 1 ½ and from the age of 50 years onward for 2.

The judges have now decided to make a further differentiation, whereby years of service until the age of (i) 35 count for ½; (ii) from 35 to 45 for 1, (iii) from 45 to 55 for 1 1/2, and (iv) from 55 onwards for 2. This change is intended to reflect the improved employment opportunities for young people while continuing to protect older employees.

The employee's position in the labour market and employer's financial condition - the correction factor

In applying the C factor, the sub-district court judges want to pay more attention to special circumstances, which in their view currently do not receive enough weight in certain cases. These circumstances mainly concern the employee's position in the labour market and the employer's financial condition.

An employee who has been given the opportunity to update and improve his skills through, for example, taking courses etcetera, has a better position in the labour market - and thus requires less financial protection - than an employee who has not been given such opportunities. An employee who works in a sector in which there a substantial shortage of personnel likewise requires less protection than one who works in a sector in which there is substantial unemployment.

The judges also want to be able to consider the employer's financial condition more than is possible under the current formula. An employer should be allowed to show, through annual reports and accounts and substantiated projections, that he cannot afford the severance pay calculated according to the formula.

Older employees

The third change concerns employees who are approaching retirement age. The present Recommendations (i.e. the text in which the formula is explained by the Association) state that the severance pay may not be higher than the income the employee can be expected to lose as a result of the rescission, up to the retirement age. That recommendation has become difficult to apply because the retirement age is no longer always 65. For such an employee, account will be taken of the age at which that he would have been expected to retire had the employment contract not been rescinded in the meantime.

Short employment relationships

In the case of a short employment relationship, the sub-district court judges in practice sometimes deviated from the formula. The amended Recommendations provide that the formula will also apply to an employment relationship that is rescinded within two years of its inception. In the case of an employment contract for a fixed period without a right of interim termination the severance pay should in principle be equal to the salary over the remaining contract period.

Bill to be introduced by Minister of Social Affairs and Employment

The Minister of Social Affairs and Employment, Piet Hein Donner, is expected to submit a legislative bill setting a maximum amount of severance pay for employees in the highest salary group, i.e. EUR 75,000 per year and above. The Association does not see this as a reason to delay updating its formula, since the outcome of the parliamentary debate of such legislative bill is still uncertain. Only as from the date on which such legislative bill becomes a law, the legal maximum amount will apply to this salary group.

Rescind in 2008 or wait until 2009?

Should you have questions regarding the changes before that time, you are of course welcome to contact us. If you expect to be rescinding one or more employment contracts now, in the near future, until 1 January 2009, we would advise you to calculate the severance pay you will possibly owe under the present and under the amended formula. We would of course be pleased to help you make this calculation and advise you further in this regard.